States Continue to Lead on Policies for Economic Recovery

NOTE: In the video above, ALEC CEO Lisa Nelson, Executive VP of Policy and Chief Economist Jonathan Williams and Senior Director Lee Schalk hosted a webinar with economists Stephen Moore and Casey Mulligan to discuss their latest report, Bonus Unemployment Benefits Are Causing Major Labor Shortage in America. The webinar detailed how the expanded unemployment insurance payments are incentivizing people not to work.

Expanded unemployment payments – such as the bonus $300 per week benefits authorized by the federal “American Rescue Plan Act” (ARPA) legislation –encourage people not to work, thereby slowing economic recovery. In many situations, it is possible for individuals to collect more in unemployment and other benefits than the wages they would earn if they returned to the workforce.

Economists across the ideological spectrum, from Casey Mulligan and Stephen Moore (read their June 2021 report here), to Lawrence Summers, have warned us about unforced errors with unemployment related policies. This should be a key lesson for all of us to remember from economics 101: When you tax people who work, and pay people who do not work, no one should be surprised when we have fewer people looking to work.

New data from the U.S. Bureau of Labor Statistics revealed the number of job openings across America just reached a staggering 9.3 million – a record number since the bureau started reporting this information in the year 2000. The National Federation of Independent Business (NFIB) released its monthly Small Business Optimism Index. While optimism has increased since January, a record 48% of business owners reported job openings that could not be filled.

Even with small businesses increasing compensation, it is difficult, if not impossible, for them to compete with the federal government’s printing presses, which continue financing the bonus unemployment payments.

Recently, states have started to address this problem. Governor Greg Gianforte of Montana and Governor Henry McMaster of South Carolina led the way, stating that their two respective states would end participation in a range of federal programs created under the CARES Act last year and extended under ARPA, including the additional $300 per week for unemployment benefits authorized by ARPA.

Now 25 states have announced that they will stop giving expanded unemployment payments over the summer with many states ending the payments in June. A new report from the Foundation for Government Accountability uncovered some fascinating information. As the first 22 states announced their withdrawal from the unemployment bonus payments, job applications immediately increased by 5%.

Last year, after the economic downturn, state unemployment insurance (UI) trust funds were predictably under immense stress. In an annual report on UI trust fund solvency released in March, the Department of Labor found that 37 states fell below the minimum level required to meet “adequate solvency.”

In May, the U.S. Department of Treasury released a statement providing guidance on the use of $350 billion in Coronavirus State and Local Fiscal Recovery Funds from ARPA. Treasury clarified that federal funds can be used to replenish unemployment insurance (UI) trust funds up to pre-pandemic levels, if state policymakers choose to use these resources. If they choose that option, states will avoid damaging tax increases levied on employers who pay taxes into their respective UI state trust funds.

Yet another complicating factor to the stability of state unemployment systems is widespread improper payments and fraud. On top of the millions of people put out of work last year, the United States Department of Justice found that international organized criminal groups used stolen identities to file for fraudulent UI benefits. Recent reports show that billions in unemployment benefits last year were spent on falsified claims, straining state UI funds even more.

The best way forward for states to solve these unemployment insurance issues is to remove disincentives for people to get back to work, by following the examples of Montana and South Carolina, and the states that followed their lead. As people get back into the workforce, state and federal policymakers must seriously consider unemployment insurance reform that will help those who lose their jobs, and also prevent future fraud. These efforts will protect state financial solvency – and more importantly, protect hardworking individual taxpayers and employers.

A strong economic recovery is indeed attainable, but smart policy reforms are needed to remove hurdles to the recovery.